Great Books

Charles Ellis: Winning the Loser's GameThink you can beat the pros? Don't be silly. You can't beat the pros in baseball or football, and you can't beat them in the stock market. Unless you play a different game.

The best way to invest more intelligently is to develop a solid knowledge base with which to make decisions. The best way to do this is to read a few good books. Doing so will take time, but the investment should have an extraordinary return. In fact, assuming you read the right books, the hours you spend acquiring basic investment knowledge will likely be among the best-compensated of your life.

Given the sheer tonnage of investment books, choosing a handful of good ones can be difficult. If you are like most people, you will be tempted by those that promise to tell you how to "Make a Million!" or "Beat the Pros!", or those that suggest that Wall Street is just a big con game: "What Your Broker Doesn't Want You To Know." Both types of books are fun to read, and both usually contain tidbits of useful information. Both are also perennial best sellers: Everyone wants to believe they can beat the market, and everyone also wants to believe that reason they didn't beat it is that they got swindled.

The books to read if you want to learn how to invest intelligently, however, will not promise to teach you how to beat the market, get rich quick, or beat the pros. Instead, they will teach you:

Why beating the market is so difficult, even for professionals

Why you should ignore almost everything you hear about what stocks are doing, have done, or might do

Why you shouldn't try to pick superior stocks

Why you shouldn't try to pick superior funds

Why you shouldn't try to time the market

Why keeping costs low is so critical--and why most investors fail to do this.

How to construct a portfolio with the appropriate risk/reward profile

What to expect in terms of yearly volatility and long-term returns

Why your broker/advisor/friend/guru will never be able to tell you with certainty what the market is going to do (because no one knows).

Why Warren Buffett is NOT an appropriate role model for most investors

Why "benign neglect" is a more intelligent investment strategy than frequent trading

Why (and how) your interests differ from those who are paid to tell you what to do

The Wall Street Self-Defense Manual provides a basic overview of these and other topics. The following books explore the same subjects in greater detail. Most are classics and have survived intense scrutiny over the years.

Common Sense on Mutual Funds, by John Bogle. The founder of Vanguard and a prolific speaker and author, Bogle is a true hero for small investors. This book lays out the facts about long-term mutual fund performance and shows why choosing active funds (run by stockpickers) over low-cost passive funds (index, asset class or total market) is, in almost all cases, dumb. The main reason passive funds beat active funds is that they have lower costs. Bogle's key insight--far more profound than it sounds--is that "You get what you don't pay for." If you're only going to read one investment book, read this one.

Winning The Loser's Game, by Charles Ellis. Think you can beat the pros? Don't be an idiot. The resources, experience, and skill that the average investment professional brings to the trading game create an advantage similar to that between Major Leaguers and beer-league softball players. Despite this awesome advantage, moreover, most professionals lose the trading game (do worse than they would have if they had just bought low-cost index funds). The only way you can beat the pros is to play a different game.

A Random Walk Down Wall Street, by Burton Malkiel. The point of Malkiel's classic is not that stock performance is random. It is that most apparent investment skill is random. Stocks can only go up or down, which means that traders have, at worst, 50/50 odds. It is not hard to make money with these odds (in fact, it is hard not to make money). It is also not hard to mistake oneself for an investment genius when, in reality, one is just an average member of an enormous crowd of people flipping coins with 50/50 odds.

Stocks for the Long Run, by Jeremy Siegel. An excellent primer on long-term asset-class returns. Shows why stocks are considered the "best investment for the long haul," as well as how long this "long haul" really is (in some cases, 30 years--a.k.a., eternity). A solid knowledge of market history will help you prepare yourself psychologically for the risks and volatility to come. It will also help you begin to ignore the cacaphonous day-to-day noise produced by Wall Street and the investment media.

The Intelligent Asset Allocator and The Four Pillars of Investing by William Bernstein. A doctor turned super-high-net-worth investment advisor (and author), Bernstein knows how to write as well as invest, and he also knows how to make complex, math-intensive topics comprehensible to liberals-arts-minded folks.

MICHAEL MAUBOUSSINSmart, cross-disciplinary thinker who doesn't waste time predicting future, making trading calls, or being mostly bullish. Identifies what smart investors do that others don't.

JOHN BOGLEFounder of Vanguard and true hero for small investors. Appalled by the billions the investment industry pays itself each year for subtracting value. Has arguably done more for small investors than anyone in history.

WARREN E. BUFFETTOf course, but note why: Few predictions, no market timing, no trading, no strategy drift, and favorite holding period of "forever." Also note how utterly different this is than frantic trading and predicting that usually passes for "smart investing."